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Systematize the theoretical issues on foreign exchange reserves and macroeconomic stability. Supplement the theoretical framework on the impact of foreign exchange reserves on some indicators related to macroeconomic stability such as GDP growth, exchange rate, balance of payment and inflation. Analyse of the macroeconomic situation, actual situation of foreign exchange reserves and the impact of the foreign exchange reserves on macroeconomic stability in Vietnam in the period of 2000 – 2016. Suggest measures to strengthen the foreign exchange reserve, contributing to the objective of macroeconomic stability and restrain macroeconomic instability in the next phase in Vietnam.
1 INTRODUCTION Background The recurrence of recent financial crises has prompted countries to struggle to find ways to protect the economy from the financial risks and challenges Since the 1996-1997 East Asian financial crisis, global real foreign exchange reserves have increased by more than three times Foreign exchange reserves are considered as a safeguard against financial openness, namely the sudden reversal of capital flows and financial crises As a result of the Asian financial crisis, the IMF stressed the importance of foreign exchange reserves as means of preventing and managing the crisis According to Nugee (1999), foreign exchange reserves are used by the countries to support monetary policy and foreign exchange policy as well as many other purposes to meet macroeconomic objectives such as monetary and domestic payment system stability and export support Recent studies by Blanchard with his colleague (2010) and studies by Aizenman and Sun (2010) show that even the countries with high amount of foreign exchange reserves have been forced to use (or fall) its reserves These studies have found some evidences proving that foreign exchange reserves are important "shock release" for the economy before the financial crisis Actually, a high amount of pre-crisis reserve assets can help to protect the country against speculative attacks that could result in declining stockpiles, leading to many other potential monetary attacks In this situation, reserves can be understood as the final lender function of the central bank Foreign exchange reserves contribute to macroeconomic stability by affecting various macro variables such as GDP growth, balance of payment, exchange rates and inflation How to maintain foreign reserves effectively to help a country stand out from the bad effects of external economic shocks is a matter of concern of many economists and policymakers The importance of foreign exchange reserves depends on the exchange rate regime that the country is committed to pursuing Foreign exchange reserves are particularly important under the policy of fixed exchange rates since the central bank has to intervene in the foreign exchange market to maintain the fixed exchange rate (Edwards, 1983) The greater the international reserves are, the greater the central bank's ability to intervene and the greater the confidence of the market in the regulator's exchange rate claims is Meanwhile, under the floating exchange rate regime, the central bank does not need to intervene to maintain the exchange rate but the exchange rate will operate in accordance with supply and demand rules So national reserve is not necessary (Crockett, 1978) In fact, any government that pursues the exchange rate regime is very interested in the fluctuation of the exchange rate Therefore, maintaining and improving foreign exchange reserves always draw concerns of policy regulators (Calvo and Reinhart, 2000) In addition to being used to intervene in exchange rates, as a country, particularly emerging country, increasingly integrates into the global economy, especially financial integration, foreign exchange reserves are not only for avoiding risks and the impact of the crisis but also be built to neutralize, prevent in advance attacks from speculative forces It also helps the country to better deal with macroeconomic shocks due to sudden capital reversal Hedging the economy with foreign exchange reserves is also a good way to reduce dependence on international aids such as the IMF or the World Bank since these aids not only cause dependence on these institutions but also remain corollaries on political and national status issues Even, these aids sometimes make the situation worse With the countries which are not directly affected by the crisis, foreign exchange reserves also play a very important role in the event of a sudden outflow of capital due to the crisis of confidence in developing countries If a country has too too big amount of foreign exchange reserves, the cost for management of foreign exchange reserves will be arisen as the profit from foreign exchange reserve investment is often lower than the cost of borrowing foreign capital If the country has too little reserve, the solvency as well as national financial security will eventually affected Foreign exchange reserves are also used by the countries to support monetary support and foreign exchange policy Over the past two decades, foreign exchange reserves have increased significantly, especially in Asian countries Huge amount of foreign exchange reserves in these countries is the result of the need for prevention, reflecting demands of self protecting against the limitation due to sudden loans from other countries to stabilize the macro economy Macroeconomic stability is one of the most important issues among modern macroeconomic concerns in the world Recently, macroeconomic imbalances have been affected by many factors, caused by current globalization progress Foreign exchange reserve is one of the key economic indicators for the countries, especially developing economies to be opening, liberalizing international capital transactions as Vietnam In Vietnam, after the continuous rise and peak in middle 2008, due to the negative impact of the global financial crisis and domestic macroeconomic instability, the State Bank had to use foreign exchange reserves to intervene, leading to dramatical reduction of foreign exchange reserves Since 2014, positive economic policies have helped Vietnamese economy to recover with the increase of the national foreign exchange reserves again The amount of foreign reserves as of December 2016 was about 38 billion However, compared with other countries in the region, this figure is still modest and relatively low Due to opening up and integration into the global economy, especially after recent global financial crisis, Vietnam needs to stabilize the macro economy Macroeconomic stability is also a precondition for Vietnam's economy to grow more sustainably, especially in the medium and long term Foreign exchange reserves are one of the factors contributing to the stabilization of the macro economy, which helps us to actively deal with external economic shocks From the above, it can be seen that the study of foreign exchange reserves, assessing the effects of foreign exchange reserves on macroeconomic stability is pratical requirement Based on that, the author has chosen to study the topic "Impact of foreign exchange reserves on macroeconomic stability in Vietnam" Research objectives, research subjects and methodology Research objectives: The thesis focuses on the objectives as follows: - Systematize the theoretical issues on foreign exchange reserves and macroeconomic stability - Supplement the theoretical framework on the impact of foreign exchange reserves on some indicators related to macroeconomic stability such as GDP growth, exchange rate, balance of payment and inflation - Analyse of the macroeconomic situation, actual situation of foreign exchange reserves and the impact of the foreign exchange reserves on macroeconomic stability in Vietnam in the period of 2000 - 2016 - Verify the impact of foreign exchange reserves on some variables reflecting macroeconomic stability in Vietnam according to the quarterly frequency data from 2000 to 2016 - Suggest measures to strengthen the foreign exchange reserve, contributing to the objective of macroeconomic stability and restrain macroeconomic instability in the next phase in Vietnam Research subjects: Impact of foreign exchange reserves on macroeconomic stability in Vietnam Research scope: The scope of the study is the volatility of Vietnam's foreign exchange reserves in the period of 2000 - 2016, examining the progress of macroeconomic variables, macroeconomic instability and the impact of foreign exchange reserves on these variables in the same period Research question This research will answer the following questions: (1) How does the relationship between foreign exchange reserves and economic indicators reflect macroeconomic instability? (2) What are outstanding points that current situation and trends of foreign exchange reserves in the world and Vietnam recently? (3) What are the effects of foreign exchange reserves on growth and macroeconomic instability in the period of 2000-2016? (4) How to strengthen and manage well the foreign exchange reserves, contributing to macroeconomic stability in Vietnam? Approach and methodology Approach - With foreign exchange reserves: An overview of the rationale system for foreign exchange reserves Determine the impact of foreign exchange reserves on some macro variables Analyse positive and negative impact on individual macroeconomic indicators in each field to assess the macroeconomic situation of Vietnam in the period of 2000 2016 Build some solutions to meet the urgent needs of the economy for the increase of foreign exchange reserves, effective use of foreign exchange - With macroeconomic stability: In this study, the author assesses the macroeconomic situation of Vietnam based on the assessment of economic variables including GDP growth, inflation, balance of payments, exchange rate and macroeconomic instability index Methodolody: - Statistical methods include data collection, processing, aggregation, figure presentation and calculation of foreign exchange reserve rates/ M2; foreign exchange reserve/ import week; foreign currency reserves/ foreign debts, macroeconomic instability index and other indicators for the analysis and evaluation process The data used in the thesis is mainly collected from statistics of the International Monetary Fund, World Bank, State Bank of Vietnam, General Statistics Office of Vietnam, Ministry of Finance In addition, the thesis also uses information from the magazines, specialized journals and inherits the relevant research findings - Comparative method: Based on collected and processed data, the author compared the variation through the stages, periods to give more detailed assessment of the research problem - Logical method: From analyzing and systematizing the theory of foreign exchange reserves and the relationship of foreign exchange reserves with macroeconomic stability, the thesis researches the case study of Vietnam from 2000 to 2016 Based on it, the thesis synthesizes views and recommends measures to strengthen the foreign exchange reserves flexibly and proactively respond to changes in the global economy, contributing to macroeconomic stability of Vietnam in the coming time - Modeling method: The thesis develops some models that describe the impact of foreign exchange reserves on macroeconomic indicators - The thesis uses quantitative methods to analyze the impact of foreign exchange reserves on macroeconomic stability in Vietnam VAR model is used to examine the relationship between foreign exchange reserves and growth, investment, macroeconomic instability (calculated based on the ratio of public debt to GDP, inflation and exchange rates), the openness of the economy Using data has quarter frequency, from 2000 to 2016 The scientific and practical significance of the topic (1) Theoritically: - The thesis has systematized the theory of the impact of foreign exchange reserves on macroeconomic stability in Vietnam - Study the experiences of some countries such as Thailand, Korea, China in using foreign exchange reserves in the crisis, from which building lessons for Vietnam - Based on the theoretical and empirical studies conducted, the thesis develops the model to study impact of foreign exchange reserves on macroeconomic stability in Vietnam (2) Practically: - The thesis provides a relatively comprehensive view of the status of foreign exchange reserves and impacts on macroeconomic stability in Vietnam in the period 2000 - 2016 Quantitive models of macro variables are used to determine impact of foreign exchange reserves in Vietnam with some macroeconomic variables in the period of 2000 – 2016, from which showing the importance of foreign exchange reserve in the context of globalization nowadays - The thesis aims to assess the impact of foreign exchange reserves on some variables reflecting macroeconomic stability - Based on the findings of the study, the thesis offers a number of recommendations to increase the scale of foreign exchange reserves, contributing to the objective of macroeconomic stability and sustainable growth in the next phase in Vietnam - New contributions of the thesis: There have been many studies in the world with different approaches about foreign exchange reserves and the impact of foreign exchange reserves on macroeconomic stability However, the number of the researches on foreign exchange reserves in Vietnam is still very limited No research for Vietnam has been done with the calculation of MII macroeconomic instability index Foreign exchange reserves impacted and correlated with the variables in empirical studies almost reflect the theory but until now there have been no common conclusion for these studies due to differences in research subjects, selected variables, period and method Structure of the thesis The thesis is divided into four chapters with the following contents: Chapter Overview of the researches on foreign exchange reserves and the impact of foreign exchange reserves on macroeconomic stability Chapter Macroeconomic and Foreign Exchange Reserve Situation in Vietnam, period of 2000-2016 Chapter Quantitative analysis on the impact of foreign exchange reserves on macroeconomic stability in Vietnam Chapter Some recommendations to strengthen foreign exchange reserves to stabilize the macroeconomic situation in Vietnam CHAPTER OVERVIEW OF THE RESEARCHES ON FOREIGN EXCHANGE RESERVES AND IMPACT OF FOREIGN EXCHANGE TO MACROECONOMIC STABILITY 1.1 Overview of foreign exchange reserves 1.1.1 Definition of foreign exchange reserves According to the document "Handbook of International Balance of Payments" published by the International Monetary Fund (IMF) for the sixth time (2009), that summarizes the experience of foreign exchange reserves management of the countries, foreign exchange reserves are understood as follows: "Foreign exchange reserve of a country is international assets managed and used by the central bank and the monetary administration in order to directly finance for balance of payments or intervene to control exchange rates and to finance other needs such as ensuring confidence in the value of the domestic currency as well as stability of the economy It is also the main platform for foreign loans; Foreign exchange reserves include the following types of foreign exchange assets: foreign currency, gold currency, special drawing rights (SDR), IMF reserve funds and other foreign exchange assets 1.1.2 Sources of reserves and objectives 1.1.2.1 Sources of foreign exchange reserves The source of foreign exchange reserves is mainly from the surplus of the balance of payments The balance of payments, as defined by the IMF in the 6th edition of 2009 “The Handbook of International Payment Balance” is a systematic summary of, in a given period of time, economic transactions of an economy with the rest of the world Transactions, most of which are between permanent and nonresident, include transactions in goods, services and income; and transactions of financial and indebtedness to the rest of the world 7 Imports - Exports • Visible trade (manufactured goods) • Invisibles (services) Current account The Balance of payments Net foreign income - net profit and interest on foreign assets Unilateral transfer (international aid) Capital and Financial account Foreign exchange reserves Medium/Long term capital flows The macroeconomic stability is a balanced state that is maintained for a certain period of time and within a unified limit Central parameters are prices in the economy as well as other relevant indicators The convergence criteria of the European Monetary Union on macroeconomic stability are evidenced by MundellFleming's (1961) optimal monetary space theory as well as the actual establishment and operation of the Union European Monetary Union (EMS) since 1998 The Euro currency came into being in 2002, confirming the validity of the theory In fact, when considering a stable or unstable state, there is no single threshold for each macroeconomic variable Instead, there is a series of links at different levels of macroeconomic variables (eg growth, inflation, fiscal deficits, current account deficits, foreign exchange reserves) shows the state of instability In addition to single indicators to reflect macroeconomic instability, the Macroeconomics Instability Index (MII) has been calculated in a number of empirical studies to assess the state of the picture Macroeconomic stability or instability (Ismihan, 2003) Hot' money - short term flows Net change in reserves held by the Central bank Diagram 1.1: Relationship among the components of balance of payment Source: self-synthesis 1.1.2.2 Objectives of foreign exchange reserves: Firstly, implement monetary policy and exchange rate policy through intervention in the foreign exchange market, stabilizing exchange rates Secondly, maintain the liquidity of the foreign exchange market to limit negative impact in case of a financial crisis; Thirdly, adjust the balance of payment which is the reserve asset to maintain confidence in the ability of foreign debt obligations of the economy, the ability to support the value of the domestic currency, show the ability of the country's financial security to attract foreign direct and indirect investment; Fourth, reserves for national emergencies and disasters 1.1.3 Evaluation of foreign exchange reserves - The ratio of foreign exchange reserves and import value, about 12 to 14 weeks of imports or or months of imports is considered sufficient - The ratio of foreign exchange reserves and foreign short-term debts must be greater than one to ensure liquidity - Foreign exchange reserves and money supply levels are between 10% and 20% 1.2 Impact of foreign exchange reserves on macroeconomic stability 1.2.1 Definition of macroeconomic stability 1.2.2 Overview of empirical studies on the impact of foreign exchange reserves on macroeconomic stability 1.2.2.1 Studies in the world Empirical studies normally only refer to one or several indicators related to macroeconomic stability Therefore, the overview of the impact of foreign reserves on macroeconomic stability shall be separated into sub-categories to consider the effects of foreign exchange reserves on GDP growth, exchange rates, balance of payment, inflation Foreign reserves Domestic liquid bonds More saving instruments Capital investment Domestic corporate savings Collateral effects Revenue effects Credit constraint less binding Production Diagram 1.2: Impact when foreign exchange reserves increase Source: Gong Cheng (2012) 1.2.2.3 Overview of studies on the impact of foreign exchange reserves on macroeconomic stability in Vietnam 10 In Vietnam, there is no research on the impact of foreign exchange reserves on macroeconomic stability in Vietnam However, there are a number of studies and thesis on various aspects of foreign exchange reserves being mentioned in some specialized journals 1.2.2.3 Some conclusions drawn from the empirical research review: be traded for commodities that can be traded One may think that the accumulation of foreign exchange reserves leads to inflation However, this is not always the case if the foreign exchange reserves accumulation rate does not exceed the economic growth rate Higher inflation is not necessarily harmful, especially for developing countries and emerging economies The accumulation of foreign exchange reserves does not cause inflation and affects economic growth and employment, Contrary to the rapid decline of the exchange rate caused by the persistence of excessive exchange rates in the long run leading to foreign exchange crisis and inflation Sixth, there are many other factors that interact and interact with the foreign exchange reserves, the choice of variables in the analysis depends on the research context as well as the existence of research data of each country From the above synthesis, the thesis found that gaps need to be supplemented and perfected as follows: Firstly, in-country studies conducted in the world have approached quite adequately the methodology of studying the different aspects of the effects of foreign exchange reserves on macroeconomic stability factors This is still very limited in Vietnam None of the studies up to this point have been made for Vietnam calculating the composite MII macroeconomic indices Second, foreign exchange reserves in different countries are formed, managed and used differently in different countries Therefore, the assessment of the foreign exchange reserves impact to macro-economic crisis on Vietnam may not be entirely consistent with theoretical and empirical research in the world Thus, the study of the impact of the foreign exchange reserves on economic stability in Vietnam is necessary to determine which factors influence the results of the study The thesis will focus on clarifying the gaps 1.3 Experience of some countries in the world in reserve and management of foreign exchange reserves: Analysis of the actual status of reserves and management of foreign exchange reserves of some countries in the world with similar economic conditions such as Thailand, Korea and China From that point, draw lessons in the management of foreign exchange reserves for Vietnam: constantly increase foreign exchange reserves, even if the economy is still stable; Improve the quality of foreign exchange management to ensure the sustainability of this reserve; The government should be more cautious in assessing the key indicators of the economy; Continue to promote export oriented policies and attract foreign investment; To build a professional independent foreign exchange reserve management apparatus Firstly, in developing countries, foreign exchange reserve is an important macroeconomic factor to increase long-term economic growth as well as a buffer against the economy Foreign exchange reserve may inhibit the decline of output due to the sudden outflow of capital flows In developed countries, excess foreign exchange reserve will be the basis to borrow large amounts of capital in the international financial market when necessary Secondly, foreign exchange reserve has a positive effect on the real exchange rate When the exchange rate is undervalued, it will stimulate exports Foreign exchange reserve is a factor to stabilize the exchange rate Low exchange rates as part of overall export strategy Preventing the appreciation of the exchange rate through, foreign exchange reserve can curb spending and imports, thereby stimulating exports, investment and economic growth The continued appreciation of the real exchange rate will lead to the foreign exchange crisis In developing countries, appreciation of the exchange rate is detrimental to economic growth Countries with large foreign exchange reserve have higher economic growth rates High economic growth is often associated with a high ratio of trade/GDP and high rates in foreign exchange reserve/ GDP One of the ways to achieve the optimum level of international trade and receive external revenues is the accumulation of foreign exchange, leading to undervalued currencies and the promotion of exports Countries with large net worth have reduced the real exchange rate, leading to an increase in the share of exports in GDP If the exchange rate is leveled off due to the outflow of capital, it will only make the conversion of domestic savings limited to output flows, all of which would cause damage to investment Thirdly, foreign exchange reserves in developing countries that are more correlated with higher economic growth and the greater the amount of foreign exchange reserves always better for developing countries to reduce the risk of speculative attacks, foreign debt repayments and financial costs The impact of foreign exchange reserves does not only increase the rate of investment/GDP but also on the share of exports and trade in GDP The trade/GDP ratio is positively correlated with the accumulation of foreign exchange reserves and is significant in contrast to the exchange rate Fourth, in the longer term, whether the foreign exchange reserves affect the economic growth rate or not depends on actual situation of which country Some research has shown that there is a positive impact on long-term growth in developing countries in stead of developed countries Fifth, the foreign trade/GDP ratio is correlated with the increase in foreign exchange reserves, the decline of the exchange rate and the lower price that can not 11 CHAPTER MACROECONOMIC AND FOREIGN EXCHANGE RESERVE SITUATION IN VIETNAM, PERIOD OF 2000-2016 2.1 Vietnam's economy in the period of 2000-2016 2.1.1 Situation of Vietnam's economic growth in the period of 2000 - 2016 Macroeconomic stability is a prerequisite for the economy to have more sustainable growth, especially in the medium and long term This is in line with our aim to achieve rapid and sustainable economic growth Despite many achievements in economic growth, the economic growth of Vietnam in the period 2000-2016 was unstable and facing macroeconomic instability GDP growth rate was unstable and declined from over 8.2% in 2004-2007 to approximately 6.0% in 2008-2011 and reached 6.21% in 2016 Based on Macroeconomic progress and data, it can be said that in the past two decades, Vietnam's economy has grown mainly broad based, mostly on continuous increase in input resources, especially capital and labor intensive while the efficiency of using resources is low and slowly improved 2.1.2 Inflation It can be seen that inflation and growth have connection when high economic growth goes with high inflation and other macroeconomic instability Vietnam's inflation rate fluctuates erratically, unstably with the highest rate at digits figure and lowest point at 0% only The reason for unstable inflation is that measures to promote economic development are short-lived, lack of long-term vision Vietnam's broadbased growth model results in low productivity 2.1.3 Balance of payments In the past 17 years, the balance of payment of Vietnam has been almost continuously surplus Current and financial account balances show that trade and investment activities are major contributors to the balance of payments surpluses Current account deficit from 2002 to 2011 The most serious deficit level was in 2007 - 2010, and reached a record in 2008 with $10.8 billion, equivalent to 11.8% of GDP It is quite fortunate that Vietnam maintains a surplus in its capital account (to offset the current account deficit), thereby avoiding the balance of payments crisis, Until 2011, current deficit is reduced to $0.7 billion, accounting for 0.5% of total GDP However, the improvement of the balance of payments is not sustainable as it depends mainly on exports and imports is material production without development of the internal strength 2.1.4 Exchange rate Exchange rate of Vietnam fluctuates flexibly with the world financial market In general, the exchange rate management of Vietnam over the past time can be summarized as follows: strong devaluation when the economy was in crisis, pressure from the big market and the official exchange rate and exchange rate in the free market are different too much and turns to be stable every time the economy comes into stability 12 2.2 Situation of Vietnam’s foreign exchange reserves in the period of 2000-2016 2.2.1 Legal framework related to foreign exchange reserves So far, the legal framework for the management of foreign exchange reserves has been more and more perfect It is in line with the country's development process With the promulgation of the Ordinance on Foreign Exchange and guiding documents of The State Bank of Vietnam, in the context of large economic changes, external economic activities and the trend of international economic integration has expanded to meet the new requirements of the management of foreign exchange reserves 2.2.2 Trends in foreign exchange reserves Vietnam’s foreign exchange reserve has seen remarkable growth along with economic growth However, the number of foreign exchange reserves of Vietnam published by different organizations is not the same For example, at the end of 2010, according to the Ministry of Planning and Investment (MPI), Vietnam’s foreign exchange reserve declined to just $10 billion At the same time, according to the rating agency Moody, Vietnam’s foreign exchange reserve is 12.2 billion USD, meeting 5-6 weeks of import That is worrisome for the stability of the foreign exchange market in particular as well as the stability of the economy in general Thus, the disclosure of foreign exchange reserves is needed in the coming time to provide researchers with a complete and accurate set of data serving the analysis and evaluation 2.2.3 Progress of foreign exchange reserves structure Vietnam’s foreign exchange reserves include foreign exchange, gold, SDRs and Vietnam’s reserve position at the International Monetary Fund In which, foreign exchange accounted for a very large proportion and increased over the years In addition, the amount of cash or foreign exchange in foreign currency sent to foreign banks also accounts for a large proportion of foreign exchange 2.2.4 Assessment of foreign exchange reserves following some indicators 2.2.4.1 Foreign Currency Reserve Ratio in compared with Short-term Debt The reserve ratio on short-term foreign debt (including short-term debt to one year and medium and long-term loans payable in the year) has also increased over the years The growth rate is even faster than the number of months of guaranteed imports This is a positive sign showing that the ability to finance well the whole economy of foreign exchange reserves in the absence of foreign borrowings in a year Moreover, this ratio also shows the ability to pay off foreign debts in the coming year 13 14 quantitative analysis in the next chapter of the thesis to clarify the relationship between foreign reserves and macroeconomic stability in Vietnam Diagram 2.31: Foreign exchange reserves/external debt in 2000-2016 Source: International Financial Statistics, IMF Therefore, this indicator has reached the standard level and it can be seen that short-term external debt has not remained pressure on Vietnam’s foreign exchange reserves 2.2.4.2 Foreign Exchange Reserve Ratio in compared with Broad Money Supply (M2) The period of 2010-2016 was extremely difficult for Vietnam’s foreign exchange reserves, including the guarantee of foreign exchange reserves to maintain financial security Foreign exchange reserves/M2 ratio was less than 15% only, falling sharply below the benchmark This is clearly showed when three indicators assessing the scale of foreign exchange reserves of Vietnam are much lower than the standards of international financial institutions This is a point that Vietnam needs to improve in the coming years 2.2.4.3 Foreign exchange reserve ratio compared with import week Although Vietnammese foreign exchange reserves have been improved, in compared with ASEAN countries, it can be seen that when counting by import months, Vietnam’s foreign exchange reserves are still low in the region and only higher than Laos or Myanmar in the same period Above comparison shows that Vietnam needs to continue to supplement and strengthen foreign exchange reserves to bring its ratio to equal to the regional average 2.2.5 Reason for fluctuations in foreign exchange reserves 2.3 Identify macro stability via the MII index The MII is calculated based on a combination of four indexes reflecting macroeconomic instability (in the author's point of view), which are inflation rate, change in exchange rate, the budget deficit over GDP This has partly reflected the signal of macroeconomic instability in Vietnam This index will be used in 15 16 CHAPTER QUANTITIVE ANALYSIS ON IMPACTS OF FOREIGN EXCHANGE ON MACROECONOMIC STABILITY IN VIETNAM 3.1 Data Description The database used in the empirical model was collected from the IFS database of the International Monetary Fund (IMF) and the General Statistics Office of Vietnam (GSO), in the period 2000Q1 to 2016Q4 with total 68 observations for each variable Some variables with no quarterly data will be used the method of separating yearly data into quarterly data according to the data conversion methods provided in the Eviews software (frequency conversion method) Data used in the study included Gross National Product (GDP) by average prices in 2010 per numbers of the employees having jobs in the economy (GDPPR), total foreign exchange reserves excluding gold over GDP (RESY), the index reflecting economic instability (MII), the ratio of FDI to GDP (FDIY), trade openness of the economy (OPY), actual exchange volatility (VREER) and Consumer Price Index volatility (VINF) Before the transformations, all variables were assigned to the same currency, index variables and real variables were standardized according to 2010 comparable prices Seasonal variables such as GDPPR, FDIY, OPY, RESY are adjusted for seasonality by the TRAMO/SEATS method These variables are then converted to the value of the natural logarithm 3.2 Specify empirical model 3.2.1 Specify the generic model The general model specified in the empirical study of Vietnam can be described as follows: LNGDPL=f(LNFDIY, LNOPY, LNRESY, MII, VREER, VINF) (3.1) The general non-constrained VAR model will be described as follows: ADF Critical value (t statistics) Statistical Probability 1% 5% 10% value Value of the variables (Constant, Linear Trend) LNGDPL 1.439043 1.0000 -4.100935 -3.478305 -3.166788 LNFDIY -2.972829 0.1475 -4.100935 -3.478305 -3.166788 LNOPY -2.357138 0.3982 -4.100935 -3.478305 -3.166788 LNRESY -2.942904 0.1564 -4.105534 -3.480463 -3.168039 MII -3.085185 0.1188 -4.110440 -3.482763 -3.169372 VREER -2.347670 0.4026 -4.115684 -3.485218 -3.170793 VINF -0.958180 0.9415 -4.127338 -3.490662 -3.173943 First differential (Constant, Linear Trend) -6.619291 0.0000 -4.103198 -3.479367 -3.167404 ∆LNGDPL -11.66278 0.0000 -4.103198 -3.479367 -3.167404 ∆LNFDIY -6.889986 0.0000 -4.103198 -3.479367 -3.167404 ∆LNOPY -3.680545 0.0307 -4.103198 -3.479367 -3.167404 ∆LNRESY -10.01887 0.0000 -4.113017 -3.483970 -3.170071 ∆MII -5.909410 0.0000 -4.115684 -3.485218 -3.170793 ∆VREER -5.992633 0.0000 -4.127338 -3.490662 -3.173943 ∆VINF Source: author's calculations from collected data *Delay specification for VAR model The optimal latency for the selected VAR model is based on testing loglikelihood test Table 3.3 With given optimal latency results of the VAR model, the LR, AIC test values all suggest delays in the optimal latency of the VAR model Table 3.3: Determine the optimal latency for the VAR model (3.2) In which Y vector is a set of endogenous variables: Y’=( LNFDIY, LNOPY, LNRESY, MII, VREER, VINF) Exogenous variables such as dummy variables, trend variables, and seas can be found in Dt Variance decomposition analysis will be used to examine the impact of shocks on variables in the model at the study period At the same time, the study will also use Johansen - Juselius Method to test the cointegration relationship among the variables in the model If there is a co-integration relationship between variables, the ECM model will be used to find the long-term relationship based on the form of the transition function from the unbound VAR model: (3.3) In which, Π=αβ’, α correction parameter matrix, β is the coefficient matrix of integrated copper vectors and ΠYt-1 is the error correction 3.2.2 Specify empirical model *Unit testing Table 3.2: Unit testing result (Augmented Dickey-Fuller test) Variables Lag LogL LR FPE 268.2858 956.1426 1059.415 1140.155 NA 1105.081 142.2115 92.65180* 1.13e-12 9.33e-22 1.76e-22 8.05e-23* AIC SC -7.648715 -6.437558 -28.59484 -25.68806 -30.37427 -25.77187* -31.41491* -25.11689 HQ -7.174051 -27.45564 -28.57055 -28.94665* Source: results from the VAR model 3.2.3 The cointegration test The LR test results show that the log-likelihood value is calculated at 98,0532 At the significance level of 5% of the distribution value χ2(5)=11,07, we can except the hypothesis that H0 does not exist in the cointegrated vectors Thus, the appropriate 17 18 model is the model with interlocking points and trends in the co-integration relationship and the system has co-integration relationships 3.3 Experimental results a) Variance Decomposition results Variance Decomposition for all the variables in the model were conducted through Decomposition method of Cholesky with the variables arranged in the orders as follows: LNGDPL, LNFDIY, LNOPY, LNRESY, MII, VREER, VINF The results of the decomposition show that, the forecast error tends to increase over time b) Long term relationship and ECM model - The results estimated in Equation (CointEq1) show that increases in foreign exchange reserves, FDI inflows, trade openness have positive impact on real GDP growth per capita at statistical significance level of 1% This shows that through foreign exchange reserves, improved FDI flows and trade openness will facilitate the growth of GDP per capita In contrast, the index of economic instability and the fluctuation of the real exchange rate negatively impact on economic growth Among the estimated coefficients, The coefficient of the macroeconomic instability index that impacts on economic growth is greatest This implies that the more economic uncertainty increases, the more economic growth tends to decline - CointEq2 shows that FDI inflows, trade openness are the key factors affecting changes in foreign exchange reserves This means that if FDI inflows and trade openings increase, they tend to raise the foreign reserves accordingly - CointEq3 gives us a very important conclusion that if foreign exchange reserves increase, macroeconomic instability will decline at a statistically significant of 1% This implies, in the long term, that increase in foreign exchange reserves will help Vietnam to increase macro stability At the same time, the results also show that exchange rate fluctuations are also considered a risk factor causing macro instability - CointEq4 and CointEq5 show what makes negative impact on FDI inflows is the risk caused by fluctuations in real exchange rates, fluctuations in general prices and trade openness In addition, cause of changes in the general price level of the economy is the impact of trade openness and FDI inflows * Estimated results of ECM model The results from the ECM model show that FDI inflows tend to improve economic growth in the short term and at the same time they are also the factors that help to reduce macroeconomic instability The macroeconomic instability is influenced by volatility in the overall price level or the increase in inflation risk with statistical significance of 1% At the same time, in the short-term, fluctuations in foreign exchange reserves show unclear impact on the macro-volatility index CHAPTER SOME RECOMMENDATIONS TO STRENGTHEN FOREIGN EXCHANGE RESERVES TO STABILIZE THE MACROECONOMIC SITUATION IN VIETNAM 4.1 General conclusion on research results 4.1.1 Impact of foreign exchange reserves on macroeconomic stability in Vietnam The quantitative analysis in Chapter shows the effect of foreign exchange reserves on macroeconomic stability in Vietnam in 2000-2016 Accordingly, in the short term, the two main factors leading to improved economic growth and reduced macroeconomic instability are fluctuations in FDI inflows and the impact of fluctuations in real exchange rates and volatility of the general price Fluctuations in foreign exchange reserves show unclear impact on macroeconomic volatility However, in the longer term, the increase of foreign exchange reserves, FDI inflows, trade openness has a positive impact on economic growth while reducing macroeconomic instability 4.1.2 Conditions for increasing foreign exchange reserves, contributing to the macro economy stability Firstly, develop current investment and study to conduct new investment types Secondly, improve trade balance and monitor current balance Thirdly, promote the countermeasures to boost foreign investment Fourth, strengthen attracting foreign currency to State Bank of Vietnam Fifth, diversify foreign currency structure 4.2 Some recommendations 4.2.1 Stabilize the foreign exchange market - To implement the foreign exchange management of foreign investment activities actively and flexibly, based on the principle of gradually liberalizing capital transactions in a prudent manner in line with the liberalization roadmap Proposals on liberalizing capital transactions are approved by the Government in each period to attract and effectively use foreign capital inflows into Vietnam, contributing to the improvement of the balance of payment, the development of financial markets and the promotion of economic growth To review and synthesize obstacles and inadequacies related to investment activities in order to complete the amendments and supplements to the system of legal documents on foreign exchange and foreign investment in order to improve the investment environment, from which attracting foreign capital inflows into Vietnam, including remittances - To effectively manage foreign borrowing and lending activities, continue promoting the development of the domestic capital market through diversifying debt instruments, creating a diversified capital mobilization channel, especially medium and long-term capital in Vietnam dongs This is to limit the mobilization of capital from foreign countries, manage the foreign borrowing activities of self-borrowing 19 20 enterprises in the direction of ensuring the concentrated capital sources for production and business activities, from which creating added value for the economy - The policy of foreign exchange control and remittances should continue to be smooth, facilitating both the remittance depositors and recipients In addition, the State Bank of Vietnam should issue regulations encouraging and creating conditions for credit institutions and money transfer companies to set up an efficient payment infrastructure for remittance services, increase use of electronic payment instruments and renovation of remittances to strengthen convenience and reduce costs for remittance the recipients - Continue to implement the principle of liberalizing payment transactions, transferring money for current transactions between residents and residents on the basis of control of vouchers through authorized credit institutions, ensuring the transfer for proper purposes and in accordance with the provisions of law - Stabilize the gold market, continue to actively implement solutions to manage the gold market in accordance with Decree No 24/2012/NĐ-CP of the Government in addition to measures to control monetary policy and foreign exchange to stabilize the economy for macroeconomic stability, from which stabilizing the domestic gold market, reducing the attractiveness of gold bars At the same time, to monitor the domestic and international gold price movements as well as the situation of gold purchase and selling on the market in order to promptly introduce policies and solutions to intervene the market when necessary 4.2.2 Strengthen the conversion of the local currency - The government should encourage the use of Vietnam Dong for offshore investment to the countries having investment and settlement agreements in local currency with Vietnam At the same time, allow VND to participate in offshore loan transactions where the borrower wishes to use the loan in Vietnamese Dong to pay directly to the beneficiary in the Vietnamese territory or the third party in local currency or make clearing for the third party in Vietnamese Dong - Maintaining the difference between domestic and foreign interest rates to encourage overseas remittances to be invested into Vietnam The interest rates should be managed in line with the macro balances, ensuring the safety of commercial banks, improving the state management of monetary, credit and banking activities of the State bank of Vietnam, ensuring attractive interest rates in domestic currency Encouraging private saving through interest rate policy in the direction that when domestic inflation tends to increase, the State bank of Vietnam can actively raise the ceiling deposit rate to ensure real interest rates are large enough to stimulate saving demand of the people This also motivates foreigners holding foreign currencies, including foreign currency sent by overseas Vietnamese to change to the local currency for profit-making - The interest rate policy for USD and VND deposit needs to be maintained so that the interest rate of VND deposit is kept at a reasonable level, ensuring the difference between VND and USD, from which encouraging people to sell foreign currencies to the banking system and transferring money in VND, reducing dollarization Narrowing and gradually limitting foreign currency credit through strictly controlling foreign borrowers in order to implement the Government's consistent and consistent policy on anti-subsidization is to gradually shift from the mobilization relation - Foreign currency loans to buy - sell foreign currency The State Bank of Vietnam should continue to coordinate with the media and press agencies to conduct deep and wide propaganda so that the agencies, units and individuals are properly aware and strictly abide by the foreign exchange policy as well as purpose, significance of raising the convergence of the Vietnamese currency and gradually limit and remove dollarization in the economy 4.2.3 Monetary policy Given policies should be based on the aggregate demand of the economy to avoid exaggeration in domestic credit and to reduce dependence on foreign credit At present, the M2/GDP ratio of Vietnam increases rapidly, showing that the financial depth is increasing strongly, meaning the fragility of the financial system Therefore, it can be seen that Vietnam needs to have policy to adjust the money supply with overheating credit growth, although this will reduce the expansion of the economy, balance of current account is becoming healthier, while slowing the accumulation of short-term foreign debt with reserves of foreign exchange Capital controls should be considered as temporary method in transition phase before more financial freedom under integration commitments Vietnam should make use of this time to deal with domestic issues and build a healthy financial market During this period, there are some areas to note: - Foreign debt control: In the context that capital transactions need to be liberalized in accordance with the customary and integrated commitments, there are areas where there may be more stringent controls This means the will to innovate economic growth, restructure public investment and state-owned enterprises, establishing effective micro- and macro-surveillance mechanisms for financialbanking organizations and corporations and corporations in borrow foreign loans - Indirect portfolio control: In addition to encouraging FDI, ODA and strengthen effective management, it is prudent to be more cautious with indirect investment because of the flexibility of this capital flow 4.2.4 Improve business investment environment To continue stabilizing the macroeconomic environment, controlling inflation, stabilizing the monetary market and developing a sustainable banking system, creating long-term stability and competitive advantage for the investment environment in Vietnam Especially, it is important to ensure flexible exchange rate policy, adhere to market factors, ensuring stability To develop a safe and healthy business environment, creating opportunities for all economic sectors to equally compete under the law, from which speeding up the renovation of administrative procedures, minimizing and gradually removing troubles for the investors To continue to improve the legal environment for investment and business activities Policies must be transparent and consistent so that people can make their business plan Barriers in doing business should be removed At the same time, business 21 22 people should be facilitated to access information, technical and financial support To create an environment of equitable competition among economic sectors and avoid discriminatory policies in accessing business resources 4.2.5 Promote the role of the private sector and foreign investment With FDI sector having advantages of capital size, technology, modern management ability and deep integration capability, if they are attracted selectively according to the country's development strategy and facilitated to cooperate with domestic Small and Medium Enterprises (SMEs), together with the non-state economic sector, they will create a really strong private economic sector, which is the driving force for the development of the country The perception of the fundamental driving force of the private sector for development is the most important factor affecting development scale, speed and efficiency of not only private sector but also the economy This thorough understanding directly influences the planning and implementation of the State's mechanisms and policies to ensure the strong and effective development of the private sector, contributing to the increase of the contribution level of the private sector to socio-economic development of the country so that this sector can really become an important driving force for the development of Vietnam CONCLUSION After more than thirty years of innovation, Vietnam has made impressive growth steps, got out of underdeveloped condition and become a middle-income developing country with dynamic market economy, expanding to the global economic system and soon fulfilling many of the Millennium Development Objectives However, unfavorable progress of the world economy recently have significantly affected Vietnamese economy In recent years, Vietnamese economy has experienced long lasting macroeconomic instability because of the fundamental shortcomings of the economy due to the over-extended growth pattern of the economy Although the economy has had a high growth stage in the early 21st century and has joined the group of middle income countries in the world, the negative changes of growth, inflation, exchange rate, the deficit of the balance of payments and public debt is the concern of the macroeconomic indicators Therefore, since the issuance of Resolution 11/NQ-CP from the beginning of 2011 up to now, economic policy of Vietnam has sharply and consistently stabilized macroeconomic stability Practical implementation of Resolution 11 shows that macroeconomic stability is a prerequisite for sustainable growth Through the systematization of theoretical foundations and empirical evidence of the impact of foreign exchange reserves on macroeconomic stability, the thesis has pointed out the impact of foreign exchange reserves on the developing economy as Vietnam as well as the benefits it can bring to macroeconomic stability The study shows that there is an impact of foreign exchange reserves on macroeconomic stability However, effect of foreign exchange reserves in the short term is unremarkable The impact of foreign exchange reserves on macroeconomic stability does not occur immediately but has a lag FDI inflows, trade openness and the increase of foreign exchange reserves have an impact on long-term economic growth At the same time, increasing foreign currency reserves will help to accelerate economic growth but also and improve macroeconomic volatility index Based on the results of the study, the thesis provides some conditions for improving foreign exchange reserves, contributing to macroeconomic stability such as developing existing investment, studying and implementing new investment, improving trade balance and controlling current account balance; strengthening attracting foreign investment capital, foreign currency to the SBV, diversifying foreign currency structure At the same time, some recommendations such as stabilizing the foreign exchange market, improving the conversion of the domestic currency, monetary policy, business investment environment, promoting the role of the private sector and foreign investment are also suggested ... on the impact of foreign exchange reserves on macroeconomic stability in Vietnam 10 In Vietnam, there is no research on the impact of foreign exchange reserves on macroeconomic stability in Vietnam. .. RESEARCHES ON FOREIGN EXCHANGE RESERVES AND IMPACT OF FOREIGN EXCHANGE TO MACROECONOMIC STABILITY 1.1 Overview of foreign exchange reserves 1.1.1 Definition of foreign exchange reserves According to... signal of macroeconomic instability in Vietnam This index will be used in 15 16 CHAPTER QUANTITIVE ANALYSIS ON IMPACTS OF FOREIGN EXCHANGE ON MACROECONOMIC STABILITY IN VIETNAM 3.1 Data Description